In a long piece in The Wall Street Journal, Gwynn Guilford explains some of the major trends that could foster rising inflation in the United States. She writes (abridged):
For the past few decades, the Federal Reserve has succeeded in keeping inflation low—perhaps too low. It had an assist: Shifts in the global economy, including globalization, demographics and the rise of e-commerce, helped keep prices in check.
Some economists say these so-called secular forces have begun to reverse in ways that the pandemic has intensified.
“The factors that were…playing a significant role in that low-inflation environment last cycle are beginning to fade,” said Sarah House, director and senior economist at Wells Fargo.
That could have important implications for the Fed as it grapples with how much of the current inflation pickup is temporary, and for the U.S. economy as a whole. Ms. House said it means that either inflation will run higher in the years ahead or the Fed will have to keep monetary policy tighter than it otherwise would to meet its 2% inflation target.
Economists point to several secular shifts that could give rise to new inflationary pressures.
Globalization goes into reverse
Global trade more than doubled from 27% of world gross domestic product in 1970 to 60% in 2008, buoyed by falling barriers to trade and investment. In the U.S., it soared from 11% of GDP in 1970 to 31% in 2011. Global competition compelled companies to build elaborate international supply chains, sourcing materials and products in the cheapest possible place. They were aided by access to cheap labor, as the fall of the Berlin Wall and China’s shift toward a market economy in the 1980s and 1990s more than doubled the workforce integrated with the global economy.
Consumers in wealthy nations benefited. U.S. “core” goods prices, which strip out volatile energy and food prices, rose just 18% between 1990 and 2019. Prices for core services, most of which are produced domestically, surged 147%. Increased import content explains some of that gap, said Blerina Uruci, senior U.S. economist at Barclays. “In some ways, countries like the U.S. were importing disinflation or even deflation from their trade partners,” she said.
But the benefits of globalization “would appear to have been largely spent in a number of respects, not the least of which is the move toward anti-globalization and increasing protectionism,” said Peter Hooper, chief economist for Deutsche Bank Securities.
From demographic plenty to scarcity
The U.S., China and many large advanced economies now face a demographic squeeze that could contribute to inflation.
The larger the share of a country’s population that is working-age, the more the population tends to save, since workers in aggregate produce more than they consume. That restraint on demand tends to put downward pressure on prices. Dependents—children and retirees—have the reverse effect: They consume more than they produce.
As the U.S. population ages, the number of dependents grows more quickly than the number of people in the workforce, and inflation picks up, said Manoj Pradhan, founder of Talking Heads Macroeconomics, an independent macroeconomic research firm, and co-author of “The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival.”
Nearly 14% of retail sales are now conducted online, more than five times as much as in 2005. The price transparency from having retail prices clearly marked and aggregated online, as well as advances in delivery speeds, forced businesses to compete on price both online and offline, and to face more rivals, a phenomenon sometimes called the “ Amazon effect.” In 2017, Goldman Sachs found that online price competition may have shaved as much as one-tenth of a percentage point from annual core goods inflation.
Digital platforms such as Uber and Airbnb likely created deflationary pressure in services, too, notes Ms. House, the Wells Fargo economist. To gain users, these businesses prioritized market share over profits, often resulting in unsustainably low prices. There are signs this is reversing; Uber and Lyft fares have increased during the pandemic, and the ride-share companies face increasing pressure to turn profitable. Uber fares in the U.S. surged 27% between January and May, Chief Executive Dara Khosrowshahi recently tweeted.
Read more here.